economics essay

Effects Of Kyoto Protocol Economics Essay

Published: 23, March 2015

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the United Nations Framework Convention on Climate Change is the apex body, under whose supervision Kyoto protocol was developed. It is an agreement between many countries, which signed it and committed for reduction in green house gas. The process started with negotiations between many countries in the early December of 1997 inÂ Kyoto, Japan and with Russia's ratification, it came in to force on the 16th February of 2005. The delay was because of Kyoto required at least 55 parties to ratify it and the total of those counties emissions to be at least 55% of global greenhouse gas emission.

Some of the highlights of the Kyoto protocol are:

A total of 191 states have signed and ratifiedÂ the protocol as on September 2011

The United States of America has signed the protocol but has not ratified it.

Developed countries have binding target on emission reduction.

Developing countries do not have binding target for emission targets.

The protocol allows the member counties of "emissions trading" to meet their target.

Economic Impacts of theÂ Protocol

One of the key issues with the Protocol is its economic impact on member nations. Some critics emphasize that

Developed nations are the one who will be affected negatively most.

One of the major speculations is that developed nations who have ratified the treaty, will have to invest more in newer technologies and procedures to reduce their emissions.

It is also more obvious that developed countries need to incur more cost in enforcing stricter emission norms.

There is also possibility of an increase in the consumer price index because the companies will pass one the extra cost incurred in clean mechanism technology to consumer.

As the base year for fixing target is 1990, the countries, which have developed most after 1990, will suffer most and the countries that have slump after 1990 are at advantage. This effect can be evident on the fact that US has not ratified the treaty as it has grown considerably after 1990 and if it ratifies the treaty then it has to cut almost 30% emission costing around $100 per ton

The European union at large is at advantage because there was slump in western Europe and Russia after 1990. It is evident from the fact that it needs only $5 per ton for emission reduction target to be met.

The provisions of emission trading provided the developing countries a way to cash in on their reduced emission credits.

Kyoto Protocol in the context of India

A Macroeconomic Overview

The impact of kyoto protocol may be direct in case of developed countries but has it has indirect impact on developing countries The protocol does not make it binding on the developing countries to reduce their emission and it does not provide any reduction targets for them till. India coming under the scope of developing country has been affected by the indirect impact. The protocol has played a significant role in the reshaping overall Indian economy. The protocol has its effect on many macroeconomic parameters of India. If we take in to account the GDP of India, some of the major factors linked to kyoto protocol that have affected the GDP of India are

Investment Impact

Trade Impact

Flexibility Mechanisms Impact

Emissions Trading

Joint Implementation

Clean Development Mechanism

Fig-1 (Factors affecting the GDP of India in the context of Kyoto Protocol)

We will be limiting our discussion to the impact of 2 major factors arising out of kyoto protocol that is investment and trade on the Indian GDP.

Investment & Trade Impact on GDP

Fig-2 (Investment Impact and GDP of India)

The Investment impact can be summarised by the chart below. Kyoto protocol induces emission restrictions on the developed nations. The manufacturing industry especially the emission insensitive industries in the developed nations are the worst sufferers. Because of this restriction, these industries need to invest more capital in technology and other aspect to reduce the emission. This in turn increases the cost of production, which makes the ROI low. The low ROI (return on investment) in these developed nations makes the investment to shift to developing countries, which affects the GDP to rise. India as an important developing country has benefited from this effect.

With a close look at the Table -1 we can see that from the year 2005 onwards there was a sudden increase in the foreign direct investment. In the year 2005, it stood at $3129 million and from the year 2006 onwards, there was high growth in the foreign direct investment on an yoy basis. The FDI reached a peak in the year 2009 at $31396 million. The decrease in the FDI in 2011 was due to other economic factors. One of the major factors affecting the increase in FDI was kyoto protocol. As the FDI started to increase from the year 2005 onwards the GDP of india also saw a tremendous growth, it increased from $834.2 billion in the year 2005 to $1848 billion in the year 2011.

Fig-3 (Trade Impact and GDP of India)

As can be seen in the Fig-3 the other major impact was the trade impact, when the cost production has increased in developing countries, the import of goods from developing countries becomes less competitive. This in contrast increases the competitiveness of the exporter in the developing countries. When the export form developing countries increase, giving appositive push to the trade it creates a demand surge. Because of this, increases in demand of good, producers of goods increase the production. Moreover, increase in the production of goods increase the GDP. This can be also deduced from the Table-1, where it is evident that from 2005 onwards there was a stiff increase in the Indian export from 712087 crores to 1747500 crores in 2011. As the Export has increased this gave rise to an increase in the demand, which in turn made the supply to increase. With an increase in the supply, the GDP of India has rose from $834.2 billion in 2005 to $ 1848.0 billion in the year 2011.

Conclusion

Despite having no emission targets under the kyoto protocol India will benefit from the emission reduction compulsion of developed nations. The effect is because of trade and investment linkage with the Developed nations. India has immensely benefited from this due to a surge in its exports and increase in the FDI. The cumulative effect of these two factors has been positive on the GDP of india, which rose steeply from 2005 onwards. India played and major role in the extension of the kyoto after Jan 1 2013, before the new commitment period comes in to effect from 2020. Although the new extended kyoto does not impose any binding emission reduction targets on india, it has decided to reduce the emission intensity by 20 to 25% of the 2005 level within the year 2020.

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